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Holding China AccountableASA Details the CCP Threat to American Investors, Our Economy, & Financial Markets
The American Securities Association (ASA) is a strong advocate for the investor rights of America’s working families, pensions, retirees, and everyone in between. This is especially true when it comes to highlighting how the Chinese Communist Party (CCP) is exploiting American investors and the U.S. capital markets to fund its military and economic rise. If there’s one area of bipartisan agreement, it’s that the CCP presents a threat to freedom, democracy, and the American way of life.For years, ASA has been the only financial services voice sounding the alarm on China’s intentional efforts to use the openness of our capital markets against us. This report summarizes seven years of ASA’s advocacy in front of Congress, the U.S. Securities and Exchange Commission (SEC), and other regulatory bodies. It includes policy recommendations, regulatory comment letters, written testimony, opinion articles, and letters to the editor of national news outlets on the risks the CCP poses to American investors and the integrity of the U.S. capital markets. ASA’s efforts and thought leadership have led to: • Inclusion of the Accelerating Holding Foreign CompaniesAccountable Act (AHFCAA) in the omnibus spending bill• In 2021, the unanimous Senate passage of the bipartisanAccelerating Holding Foreign Companies Accountable Act,sponsored by Senator John Kennedy (R-LA)• In 2020, unanimous, bicameral passage of the Holding ForeignCompanies Accountable Act, sponsored by Senator Kennedy andSenator Van Hollen (D-MD) ASA stands as a resource and partner with Congress to tackle the significant challenge of stopping the CCP from funding its military and economic rise through our markets and U.S. companies who want access to the Chinese market. It’s time to end China’s exploitation of American investors and our markets. Sincerely, Christopher A. Iacovella President & Chief Executive Officer American Securities Association
Table of Contents OpinionsWhy Are American Investors Funding Chinese Fraud? (2019).......................................................................4Washington Must End China's Fraud on Our Markets (2021).........................................................................6Real Audits for Chinese Firms Listed in the U.S. (2020)..................................................................................9Wall Street's Cozy China Ties (2021)..................................................................................................................11Comment LettersLetter to SEC Roundtable on Emerging Market Risks (2020).......................................................................30Letter to SEC RE: Holding Foreign Companies Accountable Act (2021)......................................................32Letter to Financial Services Committee RE: Risks to Investors Posed by Foreign Issuers (2021)............38Letter to House & Senate Leadership RE: COMPETES Act (2022)................................................................41Written TestimonyWritten Testimony Before U.S.-China Economic and Security Review Commission (2021)....................15Written Testimony Before House Financial Services Committee on CCP Economic Threat (2023).......21
Opinions
Why Are American Investors Funding Chinese Fraud?If you think this concern is misplaced, think again.By Christopher A. IacovellaOctober 19, 2019Wall Street’s ETF issuers and index providers have funneled billions of dollars of American investor money out of the U.S. and into Chinese companies pushing the “you can’t miss out on China growth” narrative. The problem for investors is they have no insight into whether these companies are growing, protable, or losing money because the Chinese Communist Party (CCP) regularly asserts anational security privilegeto prevent routine audits from taking place. This intentionally keeps investors in the dark and subjects them to a risk of fraud that is very real.Why has this happened? Wall Street is using a loophole that allows Chinese companies to avoid the SEC’s rigorous company-specic disclosure and audit regulations and still be included in an index sold to investors through an ETF. Normally, ETF issuers rely on index providers to conduct diligence on each company they put into the index, but diligence in China is impossible because theCommunist Party won’t allow it. This roadblock should have immediately stopped the sale of these securities to America’s retail investors. But, in true Wall Street fashion, it didn’t because the ETF issuers desperately wantaccess to the Chinese marketand the index providers bowed to aregime that pressured themto increase 4
China’saccess to global capital. As a result, neither the index providers nor the ETF issuers know whether the Chinese companies in the indexes they sold are Enron-like frauds, arms of the Chinese military, orsupporting human rights abuses.If you think this concern is misplaced, think again. Earlier this year,Kangmei Pharmaceutical, a Chinese company included in MSCI indexes, had over $4.4 billion go “missing.” While the company called it an “accounting error,” China’s late-to-the-party regulatorcalled ita “premeditated and malicious cheating of investors.” How many more of these companies will have their cash go missing when the CCP determines their useful life has come to an end? As more frauds emerge, it will be America’s mom-and-pop investors who get stuck holding the bag, with limited legal recourse. It dees logic to think that retail investors are exposed to this type of risk 11 years after a nancial crisis triggered by asset-backed securities lled with fraudulent mortgages. Incredibly, the diligence failure doesn’t stop there. As if ignoring the risk of fraud isn’t bad enough, the indexes also include companies placed on the U.S. governmentEntity ListandOFAC Sanctions List. This generally happens when a company is “acting contrary to the national security or foreign policy interests of the United States” or is a “threat to the national security, foreign policy or economy of the U.S.” Yet, American investor money continues to ow into these companies. Does that make sense toanyone, except thoseproting from it? Do Americans even know that when they buy a global index ETF they could beinvesting in adversarial state-controlled companies likeRosneft, Gazprom,ZTE, Hikvision, or AviationIndustry Corporation of China?This is duciary malfeasance of the highest order. U.S. investors, savers, and retirees will suffer if these companies turn out to be frauds, and it’s almost certain that their money is being used to fund the buildup of China’s military and acyber army that relentlessly attacksthis country.The money Wall Street directed to China could have been used to fund small businesses here. America’s public companies incur an average of$1.5 million per yearin compliance costs, but Chinese companies beneting from the loophole bear none of this cost. While we believe capital should always seek out its best use, Chinese companies should no longer get a free pass from minimum audit and disclosure requirements if they want to access the American market. This change will protect investors and level the playing eld for American companies competing for the same capital.Fortunately, this is not a partisan issue. Sen. Chuck Schumer expressed concerns in a2013 letterto then-Treasury Secretary Jack Lew, and Sens.Marco Rubio,Jeanne Shaheen,John Kennedy, and Chris Van Hollen,along withSEC Commissioner Robert Jacksonhave all raised these issues more recently. We agree with their message: Investor protection and transparency in America’s capital markets must not be compromised. Any company that refuses to submit itself to basic regulatory scrutiny or has been sanctioned by the U.S. government must be removed from these indexes. While the rise of passive index investing has its benets, it’s time for Washington to prioritize America’s retail investors by closing the loophole before it causes massive losses in their portfolios. Christopher A. Iacovella is CEO of the American Securities Association.55
Washington Must End China's Fraud on Our MarketsAllowing China to continue to deceive them undermines America’s national security, economicsecurity, and our values.By Chris IacovellaChristopher A. Iacovella is CEO of the American Securities AssociationJune 1, 2020 As China’s great power competition with America intensifies, financial markets have become a frontline battleground. Anyone who denies the Chinese Communist Party is using deception as statecraft in this competition is ignoring reality or a willing participant in its grand strategy. A glaring example of this deception is China’s exploitation of our capital markets.66
China needs access to Western capital to become a dominant worldsuperpowerand it found a willing partner in Wall Street. The partnership works like this: First, Wall Street spins a narrative about emerging market returns and the “can’t miss China growth story.” Then, it markets and sells Chinese companies to American investors. After the sale, proceeds are sent to China, it continues to support these companies by putting them instock index funds, promoting them in the nancial media, and lobbying Washington on their behalf.But this arrangement only succeeds if U.S. regulators cannot audit the financials of Chinese companies. So, in 2013, the CCP persuaded high-level American of officials toagreeto give Chinese companies a “free pass” from the Sarbanes-Oxley rules enacted to protect investors in the wake of the Enron and WorldCom frauds.Since then, China has used billions of American investor dollars to nance its cyber army, its technology-driven elimination of civil liberties, its human rights abuses, and its destruction of the environment. Wall Street ignores this inconvenient truth in its pursuit of pro t.Now, the partnership is under re because the reason the CCP didn’t want U.S. regulators to audit Chinese companies has nally been exposed.America’s mom-and-pop investors, labor unions, pension funds, and retirement plans have lost millions investing in fraudulent Chinese companies. Fromreverse mergersandstock indexesto single-stock listings, this fraud has been deliberate and pervasive. Just this year, Luckin Coffee – the Chinese equivalent of Starbucks – which did an IPO last May, saw its stockdrop over 80%as investors learned of fabricated sales and shoddy accounting. Recently, two other Chinese companies – TAL Education and iQiyi – have also been accused of fraud. Over an eight-year period, a pattern of cheating has emerged.It begs the question: Is this fraud a normal part of investment risk or an intentional part of China’s larger geopolitical strategy? Facts suggest the latter, leading observers to conclude the CCP executed apurposefuland strategic defrauding of American investors in broad daylight.American investors and Washington politicians started asking why Chinese companies continue to access ourmarkets. They alsopressuredthe U.S. Securities and Exchange Commission to do more. But the 2013 agreement lets China assert a “national security privilege” to avoid therules and regulatory oversight that applyto American companies. So, without support from Congress and the administration to end the agreement, the SEC’s only option was to release astatementessentially telling investors: On China, “Buyer Beware.”How quickly things change.Earlier this month, the administrationrecognized China’s statecraftand acted swiftly to stop it. Supported by abipartisan groupin the House and Senate, itordereda government retirement plan not to invest in a Wall Street index fund holding Chinese companies. The administration pointed to 77
“serious concerns about the reliability of nancial information from Chinese companies and the signi cant risks to investors.”Last week, the Senate took action of its own,unanimouslypassing a bill that requires Chinese companies to comply with U.S. laws. The House is expected to pass this bill soon. The SEC now has overwhelming political support to protect investors and the integrity of our markets.To end China’s fraud on our markets, the SEC should: (1) terminate the 2013 agreement; (2) deregister every Chinese company that doesn’t meet the same company-speci c disclosure, audit, and reporting standards as U.S. companies; and (3) close the “passive index loophole,” which allows index funds to sell shares of an index holding Chinese companies listed on Chinese stock exchanges that are not subject toanyU.S. laws and regulations (i.e. China A-Shares).These common-sense bipartisan reforms will protect American investors and level the playing eld for American companies to create jobs for American workers.America’s capital markets are the deepest and most resilient in the world because investors have confidence the rule of law exists here. Allowing China to continue to deceive them undermines America’s national security, economic security, and our values.For a recent poll of Republican and Democratic views towards China, clickhere. This op-ed originally appeared at Real Clear Politics. To read it at RCP, click here. 88
OPINIONLETTERS Real Audits for Chinese Firms Listed in the U.S.Investors on U.S. stock exchanges deserve not only independent audits, butoversight of the auditors.December 29, 2020 11:45 am ETThe American Securities Association shares the editorial board’s concern regarding the growth of the administrative state and the suffocating effect needless bureaucracy can have on economic growth. But your editorial “Congress Punts on China Stocks” (Dec. 16) misses the mark on the Holding Foreign Companies Accountable Act, a bill that passed both chambers of Congress unanimously despite a multimillion dollar lobbying campaign against it from Wall Street.The narrative that money will flow to Chinese companies regardless of this bill rings hollow. Money managers are subject to a fiduciary obligation that prevents them from investing in companies they can’t perform due diligence on, such as those controlled by the Chinese Communist Party. In a politically charged year when Congress can’t agree on anything except naming post offices, Sen. John Kennedy, Sen. Chris Van Hollen and Rep. Brad Sherman should be applauded for taking a stand to end China’s fraud perpetrated on America’s mom-and-pop investors and markets.Christopher A. IacovellaCEO, American Securities Association9
WashingtonThe Kennedy-Sherman bill requires Chinese companies listed on American exchanges to allow the same Public Company Auditor Oversight Board supervision of their auditors as companies from the U.S. and most of the world.You say the language in the bill is vague and leaves too much to be decided by the Securities and Exchange Commission. The House passed much more specific language in the Sherman-Gonzalez amendment to the fiscal year 2021 National Defense Authorization Act. Republican senators demanded that the provision be struck from the NDAA. You suggest that rather than pass the Senate bill, the House should have amended it and made it more specific. It then would have been sent back to the Senate and likely would have died.As chairman of the House’s Investor Protection Subcommittee, I believe that those investing on U.S. stock exchanges deserve not only independent audits, but oversight of the auditors by the PCAOB. Passing the bill when we did was the only way to achieve this objective. Investors on U.S. exchanges should get the same level of financial-statement integrity whether the issuer is in the U.S., China or elsewhere.I believe that China will eventually concede and allow PCAOB review of audits of Chinese companies. China knows that if its companies aren’t on U.S. exchanges, less American capital will flow to them. That capital would then be invested mostly in U.S. companies. That wouldn’t be a bad outcome, but it isn’t the intent of the legislation.Rep. Brad Sherman, CPA (D., Calif.)Sherman Oaks, Calif.Appeared in the December 29, 2020, print edition as 'Real Audits for Chinese Firms Listed in U.S.'.10
Wall Street's Cozy China TiesOnly a bipartisan Washington can force Wall Street to stop funding the Chinese Communist Party.By Christopher A. IacovellaJune 18, 2021If there’s one area of bipartisan agreement, it’s that the Chinese Communist Party (CCP) presents a grave threat to the free world and our way of life. So why is Wall Street still nancing Beijing’s authoritarian ambitions—with investor money from Main Street America?Greed.For decades, Beijing has used Wall Street’s insatiable appetite for prot to inltrate our capital markets and fund the build-up of its economic and military power. In exchange, Wall Street receives huge fees and access to the Chinese market. This coercive quid pro quo threatens our economic and national security and harms America’s working families, savers, and retirees.11
The scale of this cozy relationship—and how it was built—is staggering. CCP-controlled Chinese companies have accessed billions of U.S. investor dollars under false pretenses for years. Between 2009 and 2012, for instance, numerous Chinese companies executed reverse mergers into dormant companies listed on U.S. exchanges, and almost all of them were frauds that left American investors with heavy losses.Then in 2013, the CCP persuaded high-level American of cials to give Chinese companies a “free pass” from Sarbanes-Oxley rules enacted after the Enron and WorldCom frauds. More recently, the CCP pressured Wall Street to include Chinese companies in international and emerging market index funds, which allows them to completely avoid our company-speci c disclosure and reporting obligations.This special treatment creates real risks for investors. Last year, Luckin Coffee—the so-called Starbucks of China—saw its stock drop over 80 percent as investors learned of fabricated sales and shoddy accounting. Two years ago, Kangmei Pharmaceutical, a Chinese company included in multiple index funds, perpetrated a “premeditated and malicious cheating of investors” when over $4.4 billion in cash suddenly went missing. These are a few examples of the purposeful and deliberate fraud the CCP has perpetrated on the American investing public with Wall Street’s help.And if the risk of fraud weren’t bad enough, a number of CCP-controlled companies listed on American exchanges and included in index funds are also on the U.S. government Entity List and OFAC Sanctions List. To get on these lists, a company must be “acting contrary to the national security or foreign policy interests of the United States” or “a threat to the national security, foreign policy, or economy of the U.S.”Despite all of that, Wall Street remains undeterred.Since modern-day China operates as a “Party-State,” funds that ow to Chinese industry can’t be separated from those supporting the CCP. In other words, there’s no way to distinguish the funds raised in U.S. capital markets from those used by the CCP to underwrite gross human rights abuses and other activities that shock the conscience.Wall Street can’t say whether the funds it directs to the CCP are used for forced labor, the ongoing internment of Uyghurs in concentration camps, the emission of more greenhouse gases than all developed countries combined, the buildup of the People’s Liberation Army, or the support of a cyber-army that relentlessly attacks the United States and other nations of the free world.Yet, despite it being so outspoken on environmental and social issues here, Wall Street’s virtue-signaling seems to end at the water’s edge. It hasn’t stopped doing business with or divested its portfolios of any security subject to communist China’s repressive regime. So it appears that no matter what the moral cost, Wall Street will work with the CCP.12
Until this changes, the CCP will persist in dumping its companies into our markets with Wall Street’s help. This means the CCP will continue to use our money to fund unspeakable atrocities, the destruction of the environment, an increasingly belligerent military, and a disinformation campaign that undermines American values.While the free flow of capital shouldn’t be impeded, communist China’s threat to humanity, the environment, investors, and our national security trump this maxim.The Biden administration recognizes this, recently warning that “China’s leaders seek unfair advantages, behave aggressively and coercively, and undermine the rules and values at the heart of an open and stable international system.”To counter the CCP threat, we need a whole-of-government approach that prioritizes the interests of the United States. It starts with a “Buy America” policy that steers American dollars away from communist China and toward American companies, so jobs can be created here.This also means that to protect America’s mom-and-pop investors, the integrity of our markets, and every American, the CCP’s access to the U.S. capital markets must end.Earlier this month, President Joe Biden signed an executive order to start that process. The order bans 59 CCP-controlled companies from our markets, and it warns Wall Street and the CCP that “any conspiracy formed to violate any prohibition in the order is prohibited.”Only a bipartisan Washington can force Wall Street to stop funding the Chinese Communist Party.13
Written Testimony
Written Testimony Before the U.S.-China Economic and Security Review Commission Hearing Entitled “U.S. Investment in China’s Capital Markets and Military Industrial Complex” March 19th, 2021 Christopher A. Iacovella CEO, American Securities Association Chairman Bartholomew, Vice Chairman Cleveland, and members of the U.S.-China Economic and Security Review Commission (Commission): Thank you for the opportunity to provide written testimony for the Commission’s March 19th hearing entitled “U.S. Investment in China’s Capital Markets and Military Industrial Complex.” This timely hearing will examine several issues critical to America’s national security and the protection of mom-and-pop investors and retirement savers in the United States. For years, the American Securities Association (ASA)1 has been the only financial trade association advocating to end the Chinese Communist Party’s fraud on our capital markets and the harm it has caused America’s working families. We are proud to have partnered with members on both sides of the aisle on the Holding Foreign Companies Accountable Act, a bill which was recently enacted into law after passing both chambers of Congress unanimously. We look forward to continuing to partner with policymakers in a bipartisan manner to further safeguard America’s national and economic security interests. Introduction History suggests that the free flow of global capital leads to more sustainable investment, helps lift people out of poverty, and brings transparency that enhances the rule of law. The free flow of capital across borders also serves to strengthen relations among nations, which furthers international peace and stability. That said, it is fair to ask whether an authoritarian regime that aggressively and coercively undermines the norms of the open international system adhered to by free societies should continue to reap the economic and financial benefits of accessing it. As China’s great power competition with America intensifies, financial markets have become a frontline battleground. The Chinese Communist Party has used deceptive statecraft to methodically exploit the U.S. capital markets. This has helped fund China’s rise while exacting 1 The ASA is a trade association that represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth. The ASA’s mission is to promote trust and confidence among investors, facilitate capital formation, and support efficient and competitively balanced capital markets. This mission advances financial independence, stimulates job creation, and increases prosperity. The ASA has a geographically diverse membership of almost one hundred members that spans the Heartland, Southwest, Southeast, Atlantic, and Pacific Northwest regions of the United States. 15
heavy costs on American investors, the U.S. economy, and the integrity of the U.S. capital markets. This outcome has been a win-win for the Chinese Communist Party. Thus, the paramount question before this Commission is: Should the Chinese Communist Party continue to access the U.S. capital markets to fund a military, cyber, and geopolitical strategy that undermines the economic and national security of the United States and establishes China as the world’s preeminent power? 2 Chinese Bond Funds and Indexes Registered investment funds that hold Chinese government bonds or track an index that includes them facilitate a transfer of savings from America’s working families, military service members, pensioners, and retirees directly to the Chinese Communist Party. Since modern day China is run as a “Party-State” and funds that flow to the CCP cannot be separated from Chinese industry, one can only assume that this money goes to underwrite everything the Chinese Communist Party touches.3 This includes factories that use forced labor,4 re-education camps for the Uyghurs,5 the destruction of the environment,6 the rise of its military,7 and a cyber-army that relentlessly attacks the U.S. and other nations of the free world.8 The Commission should examine whether registered investment funds (i.e. mutual funds and exchange traded fund) that own these bonds or track an index that includes them should be available for sale in U.S. markets. As part of that analysis, the Commission should consider that two separate presidential administrations --one Democrat and one Republican-- in control of the U.S. government believe the Chinese Communist Party is committing ‘crimes against humanity’ and ‘genocide’ against its own people.9 2 https://www.whitehouse.gov/wp-content/uploads/2021/03/NSC-1v2.pdf. Interim National Security Strategic Guidance, March 2021, pg 8. “China has rapidly become more assertive. It is the only competitor potentially capable of combining its economic, diplomatic, military, and technological power to mount a sustained challenge to a stable and open international system.” 3 https://www.asiatimesfinancial.com/ccp-announces-plan-to-take-control-of-chinas-private-sector “President issues 'important instructions' to all regions to boost party control over private enterprise and rejuvenate the nation; all firms will need employees from the party to boost law abidance and moral standard”. 4 https://thehill.com/blogs/congress-blog/homeland-security/522443-countering-chinas-forced-labor-practices; 5 https://www.bbc.com/news/world-asia-china-51697800; https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-might-blacklist-chinas-hikvision-over-uighur-crackdown-source-idUSKCN1SS28U. 6 China’s Engine of Environmental Collapse, Richard Smith, Pluto Press, 2020. 7 https://www.cnn.com/2020/10/29/asia/us-election-us-military-indo-pacific-intl-hnk-ml/index.html 8 https://www.cnbc.com/2020/07/07/fbi-chief-slams-chinese-cyberattacks-against-us-hudson-institute.html; https://www.justice.gov/opa/pr/chinese-military-personnel-charged-computer-fraud-economic-espionage-and-wire-fraud-hacking. 9 https://www.c-span.org/video/?509661-1/state-department-briefing&live Biden State Department Spokesman Ned Price: “The PRC also has committed crimes against humanity in Xinjiang against the Uyghurs, who, of course, are predominantly Muslim, and members of other ethnic and religious minority groups, and that includes imprisonment, torture, enforced sterilization, and persecution.”; https://www.msn.com/en-au/news/other/pompeo-chinas-uighur-policy-perpetrating-genocide-and-crimes-against-humanity/ar-BB1cTU6k. 16
Given the importance many institutional investors place on environmental and social issues, one would expect them to begin to divest their portfolios of any security associated with an authoritarian regime.10 Until that occurs, the Commission should investigate whether the Chinese Communist Party’s access to the U.S. capital markets through these bond funds poses direct economic and national security threats to the United States. Chinese Companies Registered in U.S. Markets The ASA has been a canary in the coal mine alerting lawmakers, regulators, and investors about the risk of allowing opaque Chinese companies to be listed on U.S. stock exchanges or included in index funds.11 Investors have no insight into whether these companies are growing, profitable, or losing money because the Chinese Communist Party regularly asserts a national security privilege to prevent routine audits from taking place.12 This intentionally keeps investors in the dark and subjects them to a risk of fraud that is very real.13 From reverse mergers and stock indexes to single-stock listings, this fraud has been deliberate and pervasive.14 Despite warnings from the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board that Chinese companies involve a “substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse,”15 many of these firms are still listed on U.S. exchanges and remain a threat to Main Street investors.16 Until more de-listings occur,17 America’s mom-and-pop investors, labor unions, pension funds, and retirement plans will continue to be exposed to fraudulent Chinese companies.18 This Commission should examine the pattern of fraud associated with Chinese companies dating back 2011 to determine whether it is a normal part of investment risk or a calculated tactic used to implement China’s larger geopolitical strategy. Many believe it is the latter.19 10 https://www.institutionalinvestor.com/article/b1qs5j405m2qtf/How-the-World-s-Largest-Asset-Managers-Are-Finally-Taking-ESG-Seriously; Interim National Security Strategic Guidance, pg 20. “In many areas, China’s leaders seek unfair advantages, behave aggressively and coercively, and undermine the rules and values at the heart of an open and stable international system.” 11 https://www.americansecurities.org/post/asa-sends-letter-to-sec-highlighting-risks-to-investors-from-chinese-companies 12 https://pcaobus.org/International/Inspections/Pages/IssuerClientsWithoutAccess.aspx; https://foreignpolicy.com/2019/02/07/we-cant-tell-if-chinese-firms-work-for-the-party/ https://www.wsj.com/articles/sec-revives-fight-over-inability-to-inspect-chinese-auditors-of-alibaba-baidu-1544229843. 13 https://www.forbes.com/sites/walterpavlo/2011/04/08/fraud-in-chinese-reverse-mergers-on-american-exchanges-and-were-surprised/?sh=29a878924f47. 14 https://abcnews.go.com/Blotter/us-investors-lose-billions-alleged-chinese-stock-schemes/story?id=18164787; https://www.ft.com/content/78b0d934-6b27-11e9-80c7-60ee53e6681d. 15 https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting. 16 https://www.nasdaq.com/articles/nyse-begins-move-to-delist-chinese-state-oil-producer-cnooc-2021-02-26. 17 In December 2020, the President signed into law the Holding Foreign Companies Accountable Act, a bipartisan bill that was strongly supported by the ASA. The legislation would grant companies up to three years to allow their auditors to be inspected by the PCAOB, as required by the 2002 Sarbanes-Oxley Act. If companies failed to allow for such inspections within that period, then they would be de-listed from U.S. Exchanges. 18 https://www.cnbc.com/2020/04/02/luckin-coffee-stock-plummets-after-investigation-finds-coo-fabricated-sales.html. 19 https://www.forbes.com/sites/peterpham/2018/02/12/whats-chinas-secret-source-of-funding/?sh=61d625a8254b. 17
The Passive Index Loophole A regulatory loophole exists which allows passive index funds and index providers to direct American investor dollars into mainland Chinese companies by including them in international or emerging market indices. Inclusion in an index can lead to billions of dollars being steered into opaque Chinese businesses.20 Investors often have no idea that by investing in an index fund, they are sending their savings to Chinese companies that avoid basic disclosure, financial reporting, and governance standards or are controlled by the Chinese Communist Party.21 Many of these Chinese companies, especially those listed on mainland Chinese exchanges, have turned out to be frauds.22 Investors have no real understanding of how the governance of a Chinese company functions but one thing is clear: when the Chinese Communist Party wants to interfere in the company’s business to force change, it does.23 As if ignoring these risks is not bad enough, index providers also include companies placed on the U.S. government Entity List and OFAC Sanctions List in their indexes. A company is generally placed on these lists if it is “acting contrary to the national security or foreign policy interests of the United States” or is a “threat to the national security, foreign policy or economy of the U.S.” A reasonable person might ask ‘how could an American investor invest in a company on an exchange or through an index if it is a violation of American law to do business with that company?’ We hope the Commission recognizes the absurdity of this reality and would support a broad policy recommendation to prohibit any such company from trading in the U.S. capital markets. In November 2020, President Trump did just that by issuing Executive Order 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.” This Order de-listed and de-indexed 31 firms trading in U.S. markets that are owned or controlled by the Chinese military. The Biden Administration has affirmed this Order, which establishes it as a template for how to prevent the Chinese Communist Party from coercing U.S. investors into sending their savings to fund China’s military and economic rise. The SEC should go further and strip these companies of their registration so they cannot bypass 20 https://oxfordbusinessgroup.com/overview/indexed-growth-inclusion-global-indices-often-results-greater-flow-funds-capital-markets-it-just-one. 21 https://pcaobus.org/oversight/international/denied-access-to-inspections; The PCAOB noted that it is unable to inspect the auditors of over 200 companies listed on exchanges in the United States or to determine who really controls them. 22 https://www.reuters.com/article/us-china-stocks-regulation-analysis/chinese-firms-missing-6-billion-tests-regulators-resolve-idUSKCN1SN0OT; https://www.scmp.com/business/companies/article/3024084/why-kangmei-pharmaceutical-found-have-committed-one-chinas; https://finance.yahoo.com/news/one-theme-popping-among-chinese-154155487.html. 23 https://www.cnn.com/2020/12/24/tech/alibaba-china-antitrust-investigation/index.html; https://www.asiatimesfinancial.com/ccp-announces-plan-to-take-control-of-chinas-private-sector. 18
the listing process and raise capital from unsuspecting American investors through the opaque ‘over-the-counter’ private market. Index related issues require enhanced scrutiny because unregulated index providers can be subject to significant conflicts of interest when selecting index components.24 The Commission should review the role index providers play in bringing Chinese companies to the American market and how their interactions with the Chinese Communist Party impact index inclusion or expansion decisions. Recommendations To end China’s fraud on our markets, this Commission should recommend that Congress require the SEC to (1) terminate the 2013 Memorandum of Understanding;25 (2) deregister every Chinese company that doesn’t meet the same company-specific governance, disclosure, audit, and financial reporting standards as U.S. companies; (3) force index funds to remove and exchanges to delist any Chinese company that is on the OFAC sanctions list, the U.S. Department of Defense list of Communist Chinese military companies, or the U.S. Department of Commerce ‘entity list’; (4) close the passive index loophole which allows index funds to steer American investor savings into opaque and financially questionable Chinese companies listed on mainland Chinese exchanges; and (5) clearly and publicly outline the legal redress or lack thereof that American investors can seek if they are harmed by registered Chinese companies. We also suggest that policymakers implement the unanimously passed Holding Foreign Companies Accountable Act as written. Neither Congress nor the SEC should deviate from the three-year de-listing timeframe, as there is little discretion left to regulators to amend the provisions of the legislation. The Commission should examine claims that American investors will simply buy Chinese companies in other markets if they are prohibited from buying them in the U.S.26 Those making such claims conveniently forget that institutional investors at every level have a fiduciary obligation to those who entrust them with their savings.27 This obligation requires institutional investors to conduct diligence on any company in which they invest. In China, thorough due diligence is impossible because the Chinese Communist Party won’t allow it.28 The Commission should weigh the cost of Chinese companies moving their listings from the U.S. to Hong Kong against the benefit of protecting American investors and the integrity of U.S. markets. 24 https://www.wsj.com/articles/how-china-pressured-msci-to-add-its-market-to-major-benchmark-11549195201. 25 https://www.shearman.com/-/media/Files/NewsInsights/Publications/2013/06/PCAOB-Announces-Agreement-With-China-On-Producti__/Files/View-full-memo-PCAOB-Announces-Agreement-With-Ch__/FileAttachment/PCAOB-Announces-Agreement-With-China-on-Producti__.pdf. 26 https://www.wsj.com/articles/china-has-one-powerful-friend-left-in-the-u-s-wall-street-11606924454. 27 https://www.americansecurities.org/post/asa-letter-to-wsj-real-audits-for-chinese-firms-listed-in-the-u-s. 28 https://foreignpolicy.com/2019/02/07/we-cant-tell-if-chinese-firms-work-for-the-party/. 19
It may also benefit the Commission to examine the types of legal, political, or reputational risks a U.S. company doing business with the Chinese Communist Party specifically, or in China generally, poses to its investors. At a minimum, it would be useful for American investors to understand the scope and potential cost of any legal liability that could arise from a U.S.-listed company doing business in China under U.S. law, international law, or otherwise.29 Conclusion Twenty years ago, the consensus theory was that as China grew wealthier, it would become a responsible international stakeholder. Unfortunately, that theory never materialized. Today, Communist China’s seeks to become the world’s dominant superpower. To realize that goal, the Chinese Communist Party needs access to Western capital. Those who still believe in the consensus theory, are willing to facilitate that access because they can profit from it. They will continue to put their own financial interests over the economic and national security interests of the United States until it is no longer legal or profitable to do so. Loopholes and exemptions have allowed the savings of American investors to fund Chinese companies that are outright frauds, arms of the Chinese Communist Party, or engaging in activities that are hostile to American interests for far too long.30 A strong bipartisan consensus in Washington has emerged that wants to end the Chinese Communist Party’s exploitation of America’s capital markets and her investors. This Commission can play an important role in recommending the policy changes necessary for Congress and the Administration to help move that consensus along. I look forward to assisting this Commission in any way that will make the investment climate safer for American investors and promote the economic and national security of our country. Sincerely, Christopher A. Iacovella Chief Executive Officer American Securities Association 29 https://www.justsecurity.org/74388/genocide-against-the-uyghurs-legal-grounds-for-the-united-states-bipartisan-genocide-determination/; https://www.washingtonexaminer.com/news/state-department-china-committing-uyghur-genocide-wont-say-if-ongoing; https://cja.org/what-we-do/litigation/legal-strategy/the-alien-tort-statute/. 30 https://healthymarkets.org/archives/2101; https://www.americansecurities.org/post/why-are-american-investors-funding-chinese-fraud. 20
Written Testimony Submission to House Financial Services Committee Hearing Entitled “Combatting the Economic Threat from China” February 7th, 2023 The Honorable Patrick McHenry The Honorable Maxine Waters Chairman Ranking Member Committee on Financial Services Committee on Financial Services U.S. House of Representatives U.S. House of Representatives Washington, DC 20515 Washington, DC 20515 Chairman McHenry and Ranking Member Waters: The American Securities Association (ASA)1 submits this testimony for the February 7, 2023 hearing of the House Financial Services Committee regarding economic threats to the United States posed by the Chinese Communist Party (CCP). The ASA has been a leading voice and advocate when it comes to protecting American investors and the integrity of our markets from CCP-controlled companies that are rife with fraud or seek to do harm to the United States and our allies. The ASA commends the Committee for holding its first hearing of the 118th Congress on the threats posed by the Chinese Communist Party, which is an affirmation that Congress is ready to address this matter with the seriousness it deserves. Overview History suggests the free flow of global capital leads to more sustainable investment, helps lift people out of poverty, and brings transparency that strengthens the rule of law. The free flow of capital across borders also serves to strengthen relations among nations, which furthers international peace and stability. However, it is fair to ask whether an authoritarian regime that aggressively and coercively undermines the norms of the open international system adhered to by free societies should continue to reap the economic and financial benefits of accessing this system. 1 The ASA is a trade association that represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth. The ASA’s mission is to promote trust and confidence among investors, facilitate capital formation, and support efficient and competitively balanced capital markets. This mission advances financial independence, stimulates job creation, and increases prosperity. The ASA has a geographically diverse membership of almost one hundred members that spans the Heartland, Southwest, Southeast, Atlantic, and Pacific Northwest regions of the United States. 21
As China’s great power competition with America intensifies, financial markets have become a frontline battleground. The Chinese Communist Party has methodically exploited the U.S. capital markets while sponsoring cybercriminals that steal the personal and financial information of Americans. This has helped fund China’s rise while exacting heavy costs on American investors, the U.S. economy, and the integrity of the U.S. capital markets. This has resulted in a win-win for the Chinese Communist Party. Thus, the paramount question before this Committee is: Should the Chinese Communist Party continue to access the U.S. capital markets to fund a military, cyber, and geopolitical strategy that undermines the economic and national security of the United States and establishes China as the world’s preeminent power?2 Congress By passing the Holding Foreign Companies Accountable Act (HFCAA) in 2020 and the Accelerating Holding Foreign Companies Accountable Act (AHFCAA) in 2022, Congress made an important decision: No company based in China (or any other country) should be able to access our markets and list on U.S. exchanges if they do not comply with U.S. laws. These HFCAA and AHFCAA are important and long overdue, but Congress, the SEC, and the PCAOB must all remain vigilant because the CCP will stop at nothing to fund its military and economic rise. Bond Index Funds Registered investment funds that hold Chinese government bonds or track an index that includes these bonds facilitate a transfer of savings from America’s working families, military service members, pensioners, and retirees directly to the Chinese Communist Party. Since modern day China is run as a “Party-State” and funds that flow to the CCP cannot be separated from Chinese industry, one can only assume that this money goes to underwrite everything the Chinese Communist Party touches.3 This includes factories that use forced labor,4 re-education camps for 2 https://www.whitehouse.gov/wp-content/uploads/2021/03/NSC-1v2.pdf. Interim National Security Strategic Guidance, March 2021, pg 8. “China has rapidly become more assertive. It is the only competitor potentially capable of combining its economic, diplomatic, military, and technological power to mount a sustained challenge to a stable and open international system.” 3 https://www.asiatimesfinancial.com/ccp-announces-plan-to-take-control-of-chinas-private-sector “President issues 'important instructions' to all regions to boost party control over private enterprise and rejuvenate the nation; all firms will need employees from the party to boost law abidance and moral standard”. 4 https://thehill.com/blogs/congress-blog/homeland-security/522443-countering-chinas-forced-labor-practices; 22
the Uyghurs,5 the destruction of the environment,6 the rise of its military,7 and a cyber-army that relentlessly attacks the U.S. and other nations of the free world.8 The Committee should examine whether registered investment funds (i.e. mutual funds and exchange traded fund) that own these bonds or track an index that includes them should be available for sale in U.S. markets. As part of that analysis, the Committee should consider that two separate presidential administrations --one Democrat and one Republican-- in control of the U.S. government believe the Chinese Communist Party is committing ‘crimes against humanity’ and ‘genocide’ against its own people.9 Given the importance many institutional investors place on environmental and social issues, one would expect them to begin to divest their portfolios of any security associated with an authoritarian regime.10 Until that occurs, the Committee should investigate whether the Chinese Communist Party’s access to the U.S. capital markets through these bond funds poses direct economic and national security threats to the United States. The “Passive Index Loophole” A regulatory loophole exists which allows passive index funds and index providers to direct American investor dollars into mainland Chinese companies by including them in international or emerging market indices. Inclusion in an index can lead to billions of dollars being steered into opaque Chinese businesses.11 Investors often have no idea that by investing in an index fund, they are sending their savings to Chinese companies that avoid basic disclosure, financial reporting, and governance standards or are controlled by the Chinese Communist Party. Many of these Chinese companies, especially 5 https://www.bbc.com/news/world-asia-china-51697800; https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-might-blacklist-chinas-hikvision-over-uighur-crackdown-source-idUSKCN1SS28U. 6 China’s Engine of Environmental Collapse, Richard Smith, Pluto Press, 2020. 7 https://www.cnn.com/2020/10/29/asia/us-election-us-military-indo-pacific-intl-hnk-ml/index.html 8 https://www.cnbc.com/2020/07/07/fbi-chief-slams-chinese-cyberattacks-against-us-hudson-institute.html; https://www.justice.gov/opa/pr/chinese-military-personnel-charged-computer-fraud-economic-espionage-and-wire-fraud-hacking. 9 https://www.c-span.org/video/?509661-1/state-department-briefing&live Biden State Department Spokesman Ned Price: “The PRC also has committed crimes against humanity in Xinjiang against the Uyghurs, who, of course, are predominantly Muslim, and members of other ethnic and religious minority groups, and that includes imprisonment, torture, enforced sterilization, and persecution.”; https://www.msn.com/en-au/news/other/pompeo-chinas-uighur-policy-perpetrating-genocide-and-crimes-against-humanity/ar-BB1cTU6k. 10 https://www.institutionalinvestor.com/article/b1qs5j405m2qtf/How-the-World-s-Largest-Asset-Managers-Are-Finally-Taking-ESG-Seriously; Interim National Security Strategic Guidance, pg 20. “In many areas, China’s leaders seek unfair advantages, behave aggressively and coercively, and undermine the rules and values at the heart of an open and stable international system.” 11 https://oxfordbusinessgroup.com/overview/indexed-growth-inclusion-global-indices-often-results-greater-flow-funds-capital-markets-it-just-one 23
those listed on mainland Chinese exchanges, have turned out to be frauds.12 Investors have no real understanding of how the governance of a Chinese company functions, but one thing is clear: when the Chinese Communist Party wants to interfere in the company’s business and force change, it does.13 As if ignoring these risks is not bad enough, index providers also include companies placed on the U.S. government Entity List, Department of Defense list of Communist Chinese military companies, and OFAC Sanctions List in their indexes. A company is generally placed on these lists if it is “acting contrary to the national security or foreign policy interests of the United States” or is a “threat to the national security, foreign policy or economy of the U.S.” A reasonable person might ask ‘how could an American investor invest in a company on an exchange or through an index if it is a violation of American law to do business with that company?’ We hope the Committee recognizes the absurdity of this reality and would support prohibiting any such company from trading in any financial product in the U.S. capital markets. In November 2020, President Trump did just that by issuing Executive Order 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.” This Order de-listed and de-indexed 31 firms trading in U.S. markets that are owned or controlled by the Chinese military. The Biden Administration has affirmed this Order, which establishes it as a template for how to prevent the Chinese Communist Party from coercing U.S. investors into sending their savings to fund China’s military and economic rise. The SEC should go further and strip these companies of their registration so they cannot bypass the listing process and raise capital from unsuspecting American investors in the ‘over-the-counter’ private market. Index-related issues require enhanced scrutiny because unregulated index providers can be subject to significant conflicts of interest when selecting index components.14 The Committee should review the role index providers play in providing Chinese companies with access to the American capital markets and how their interactions with the Chinese Communist Party impact index inclusion or expansion decisions. This Congress should close the ‘passive-index loophole’ by (1) forcing index funds to remove and exchanges to delist any Chinese company that is on the OFAC sanctions list, the U.S. Department of Defense list of Communist Chinese military companies, or the U.S. Department of Commerce ‘entity list’; and (2) preventing index funds sold in U.S. markets from including 12 https://www.reuters.com/article/us-china-stocks-regulation-analysis/chinese-firms-missing-6-billion-tests-regulators-resolve-idUSKCN1SN0OT; https://www.scmp.com/business/companies/article/3024084/why-kangmei-pharmaceutical-found-have-committed-one-chinas; https://finance.yahoo.com/news/one-theme-popping-among-chinese-154155487.html. 13 https://www.cnn.com/2020/12/24/tech/alibaba-china-antitrust-investigation/index.html; https://www.asiatimesfinancial.com/ccp-announces-plan-to-take-control-of-chinas-private-sector. 14 https://www.wsj.com/articles/how-china-pressured-msci-to-add-its-market-to-major-benchmark-11549195201. 24
opaque and financially questionable Chinese companies listed on mainland Chinese or Hong Kong stock exchanges. Protecting Investors from Fraudulent Chinese Companies The ASA is proud to have worked with members on both sides of the aisle on both the HFCAA and AHFCAA. Chinese companies that do comply with U.S. auditing standards will now be kicked off U.S. exchanges after two years, and investors are made aware of non-compliant companies through public lists maintained by the SEC and PCAOB. These laws send a clear message to any non-U.S. company that wants to list in the United States and access investor capital that U.S. laws matter. On December 15, 2022, the PCAOB announced that for the first time it was able to fully examine audit firms headquartered in mainland China and Hong Kong.15 While this is major progress, there is no guarantee that every Chinese company will be compliant with U.S. law or that the CCP will maintain its end of this agreement. As PCAOB Chair Erica Williams said when the agreement was announced: “Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong. It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them.”16 Accordingly, the ASA urges Congress to continue its oversight role regarding this matter and ensure that both the SEC and PCAOB are carrying out the HFCAA and the AHFCAA as intended and in a manner that will prevent further investor harm at the hands of the CCP. Geopolitical/Military Investor Risk It may also benefit the Committee to examine the types of legal, political, reputational, or investor risks present when U.S. companies do business with the Chinese Communist Party specifically, or in China generally. At a minimum, it would be useful for American investors to understand the scope and potential cost of any liability that could arise from a U.S.-listed company doing business in China under U.S. law, international law, or otherwise.17 15 PCAOB Secures Access to Inspect, Investigate Chinese Firms for First Time in History, available at https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-secures-complete-access-to-inspect-investigate-chinese-firms-for-first-time-in-history 16 Id. 17 https://www.justsecurity.org/74388/genocide-against-the-uyghurs-legal-grounds-for-the-united-states-bipartisan-genocide-determination/; https://www.washingtonexaminer.com/news/state-department-china-committing-uyghur-genocide-wont-say-if-ongoing; https://cja.org/what-we-do/litigation/legal-strategy/the-alien-tort-statute/. 25
This understanding would be especially useful to investors if China decides to invade Taiwan and the U.S. government imposes sanctions that would prohibit American companies from doing business in China and with the CCP, as it did after Russia invaded the Ukraine. Protecting Investors from the China Cyberthreat ASA reminds members of this Committee about an ongoing personal and financial privacy threat to every American investor: The vast collection of personal and financially identifiable information (PII) by the Consolidated Audit Trail (CAT). Last summer, the SEC again delayed the timetable for key implementation provisions of the CAT. This was the latest delay in the decade-long CAT project, which has been plagued by delays, cost concerns and, most important, concerns regarding the collection of the PII of every American investor that trades a share of stock on a U.S. exchange. For years, the ASA has called on the SEC to remove the collection of any PII from the CAT. While the ASA has generally supported the establishment of a market-wide monitoring tool for the SEC to address wrongdoing, there is no compelling reason whatsoever for the CAT to collect investor PII. The SEC has been able to bring enforcement cases for insider trading or other violations for years without collecting the type of information currently contemplated under the CAT, and it continues to do so today. The CAT isn’t just a top target for hackers and state-sponsored cyber entities from China and Russia, it’s also the target for cybercriminals who wish to either access a treasure trove of information about millions of Americans or profit from nonpublic trading data. Individuals with access to CAT information will also become high value targets for state-actors and other criminals. Obtaining the PII of American citizens to blackmail them or force them to act as spies is a routine tactic in the statecraft used by our adversaries.18 Once the CAT is fully operational, it will become the largest, most vulnerable repository of investor PII ever created. The CCP and other state sponsors of cybercrime will inevitably capitalize on this opportunity to steal the sensitive personal and financial information of Americans to manipulate our markets or blackmail Americans. If the SEC won’t fulfill its duty to protect American investors from this threat by removing their PII from the CAT, then Congress is obligated to act. For these reasons, the ASA strongly supports the Protecting Investors’ Personally Identifiable Information Act, introduced last Congress by Representative Loudermilk and Senator Kennedy. 18 https://abcnews.go.com/Business/wireStory/us-charges-chinese-military-hackers-equifax-breach-68884240 26
We hope that Congress will work on a bipartisan basis to take up this legislation early during the 118th Congress. SRO Responsibility American investors rely on self-regulatory organizations (SRO) to carry out their regulatory obligations to protect investors and the market. As a result, this Committee may want to inquire how SROs can allow American investors to trade in any company or fund that includes a company that has not complied with U.S. laws or is named on an official U.S. prohibition list. SROs have the full regulatory authority from the SEC to protect the U.S. investing public from non-compliant and militarily belligerent firms listing in the United States. Congress may also want to raise questions with SROs about certain corporate governance mandates that apply to American companies but, strangely, do not apply to Chinese companies. The American people deserve to know why access to capital in the United States is more expensive for American companies than those from Communist China. The Straw Man The Committee should be mindful of assertions that warn Congress or the SEC not to take action that prohibits American investors from buying Chinese securities in the U.S.19 This group makes the absurd claim that any such action will be fruitless because investors will simply buy Chinese securities in other markets. Those making these claims conveniently forget that institutional investors and asset managers at every level have a fiduciary duty of loyalty to those who entrust them with their savings,20 and this obligation requires them to conduct diligence on any company or fund in which they invest. In China, the satisfaction of that due diligence requirement is impossible to undertake because the Chinese Communist Party won’t allow it.21 Conclusion Twenty years ago, the consensus theory was that as China grew wealthier, it would become a responsible international stakeholder. Unfortunately, that theory never materialized. Today, Communist China seeks to become the world’s dominant superpower. To realize that goal, the Chinese Communist Party needs access to Western capital. Those who still believe in the consensus theory are willing to facilitate that access because they profit from it. They will 19 https://www.wsj.com/articles/china-has-one-powerful-friend-left-in-the-u-s-wall-street-11606924454. 20 https://www.americansecurities.org/post/asa-letter-to-wsj-real-audits-for-chinese-firms-listed-in-the-u-s. 21 https://foreignpolicy.com/2019/02/07/we-cant-tell-if-chinese-firms-work-for-the-party/. 27
continue to put their own financial interests over the economic and national security interests of the United States until it is no longer legal or profitable to do so. Loopholes and exemptions have allowed the savings of American investors to fund Chinese companies that are outright frauds, arms of the Chinese Communist Party, and/or engaging in activities that are hostile to American interests for far too long.22 A strong bipartisan consensus in Washington has emerged that wants to end the Chinese Communist Party’s exploitation of our capital markets and her investors. This Committee can play an important role in passing the policy changes necessary to protect American investors and the integrity of the U.S. capital markets. We look forward to working with members of the Committee on both sides of the aisle on these important issues. Sincerely, Christopher A. Iacovella Chief Executive Officer American Securities Association 22 https://healthymarkets.org/archives/2101; https://www.americansecurities.org/post/why-are-american-investors-funding-chinese-fraud. 28
Comment Letters
July 9, 2020 Ms. Vanessa Countryman Secretary U.S. Securities and Exchange Commission 100 F Street NE Washington, DC 20549 Re: July 9, 2020 Roundtable on Emerging Markets Risks Dear Ms. Countryman: The American Securities Association (“ASA”)1 welcomes the opportunity to comment on the upcoming Securities and Exchange Commission (“SEC”) roundtable on risks to investors from emerging markets, in particular China (“Roundtable”). The ASA has long warned policymakers and investors about the dangers of U.S.-listed Chinese firms that fail to follow basic regulatory and financial reporting standards that are required of companies based in the United States. This has directly exposed retail investors in the U.S. to Chinese companies that are outright frauds, arms of the Chinese Communist Party, or engaging in activities that are hostile to American interests. Recently, the U.S. Senate passed the “Holding Foreign Companies Accountable Act” by unanimous consent. This legislation would mandate the delisting of any company that fails to comply with Public Company Accounting Oversight Board (PCAOB) inspection requirements for three consecutive years. It would also require public companies to disclose whether they are owned or controlled by any foreign government. The ASA has strongly supported this legislation as it will provide much-needed transparency into companies based in China and other companies that want access to U.S. markets. The swift passage of the Senate bill – and expected consideration in the House of Representatives – was necessary due to the failure of the SEC and other government agencies to properly address this issue. The granting of a “free pass” from PCAOB requirements to Chinese 1 The ASA is a trade association that represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth. The ASA’s mission is to promote trust and confidence among investors, facilitate capital formation, and support efficient and competitively balanced capital markets. This mission advances financial independence, stimulates job creation, and increases prosperity. The ASA has a geographically diverse membership base that spans the Heartland, Southwest, Southeast, Atlantic, and Pacific Northwest regions of the United States. 30
companies in 2013 needlessly exposed American investors to enormous risks and eroded confidence in our capital markets and the ability of regulators to properly oversee them.2 Just in the last 12 months, at least two high-profile companies – Luckin Coffee and TAL Education – have both been accused of financial fraud. Luckin Coffee – the stock of which has dropped by over 90% - is finally in the process of being delisted in the United States. The PCAOB notes that there are still over 200 companies currently trading in the U.S. where the PCAOB is unable to inspect the books of auditors.3 While the Roundtable and joint statements from the SEC and PCAOB may incrementally raise public awareness of this issue, there is no legitimate reason for why companies should be allowed to list in the U.S. if they continuously fail to live up to our regulatory standards. Compounding this problem is the existence of a loophole that allows passive investment funds to steer investor dollars into these opaque businesses. As former Commissioner Jackson has noted, “index providers have influence over stock prices that even the largest investors can only envy.”4 Inclusion of a company in an index can lead billions of investor dollars to unwittingly flow into companies that don’t meet basic auditing standards. While there are many benefits to index investing - in particular low costs and the ability to access a broad change of stocks – this is one of the risks inherent in the approach. And at the end of the day, the argument about diversification is a red herring especially when the “growth” is based on false, misleading, and fraudulent numbers. To end China’s fraud on our markets, the SEC should: 1) terminate the 2013 agreement; 2) delist every Chinese or other foreign company that doesn’t meet the same company-specific disclosure, audit, and reporting standards as U.S. companies; and 3) close the passive index loophole which allows index funds to steer investor money into foreign companies that fail to live up to U.S. standards. Thank you for your attention and please use us a resource as you make policy in this area. Sincerely, Christopher A. Iacovella Chief Executive Officer American Securities Association 2 https://pcaobus.org/News/Releases/Pages/05202013_ChinaMOU.aspx 3 https://pcaobus.org/International/Inspections/Pages/IssuerClientsWithoutAccess.aspx 4 https://www.sec.gov/news/speech/jackson-your-index-fund 31
May 5, 2021 Ms. Vanessa Countryman Secretary U.S. Securities and Exchange Commission 100 F Street NE Washington, DC 20549 Re: Holding Foreign Companies Accountable Act Disclosure – Interim Final Rule (Release No. 34-91364; IC-34227; File No. S7-03-21) Dear Ms. Countryman: The American Securities Association (ASA)1 appreciates this opportunity to comment on the interim final rule (Rule) issued by the Securities and Exchange Commission (SEC or Commission) to implement certain provisions of the Holding Foreign Companies Accountable Act (HFCA Act). Congress unanimously passed the HFCA Act following more than a decade of fraud perpetrated by the Chinese Communist Party (CCP) that has harmed millions of America’s mom-and-pop investors, retirement savers, and working families– and the Act was long overdue. There is no reason Chinese companies should receive special treatment and lax oversight in our capital markets. Nor should our regulators enable a totalitarian regime whose goal is to supplant the United States as the world’s pre-eminent power. The ASA commends the SEC for acting swiftly on this economic and national security priority, and to implement disclosure requirements for foreign companies based in jurisdictions where the Public Company Account Oversight Board (PCAOB) determines it is unable to fully inspect financial auditors. We look forward to working with the SEC to ensure the law is fully implemented to prevent future high-profile accounting scandals and questionable governance issues by U.S. exchange-listed Chinese companies that directly harm American investors.2 1 The ASA is a trade association that represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth. The ASA’s mission is to promote trust and confidence among investors, facilitate capital formation, and support efficient and competitively balanced capital markets. This mission advances financial independence, stimulates job creation, and increases prosperity. The ASA has a geographically diverse membership of almost one hundred members that spans the Heartland, Southwest, Southeast, Atlantic, and Pacific Northwest regions of the United States. 2 https://www.sec.gov/news/press-release/2020-319 https://www.marketwatch.com/story/tal-education-shares-slide-9-premarket-after-company-uncovers-fraudulent-sales-accounting-employee-arrested-2020-04-08 https://www.institutionalinvestor.com/article/b1mlyjys554sgd/They-d-Find-Fraud-Fraud-Fraud 32
The ASA largely supports the Rule as adopted because it will inform investors about the level of ownership and control the Chinese government has in listed companies.3 Just as important, it will reveal the name of each Communist Party official that sits on a company’s board. Given the current focus on governance of public companies here in the U.S., it is logical for investors to also know about every Chinese Communist Party official who exerts control over the operations and finances of the Chinese companies listed on both the NASDAQ and the NYSE. Recommendations. As the Commission moves towards full implementation of the Rule, the ASA makes the following recommendations: (I) the PCAOB and SEC should include fiscal year 2020 audits in their determination of “non-inspection years” for issuers; (II) the Commission should publish a list of Commission-Identified Issuers on its website and issue alerts for investors regarding the risk of investing in U.S.-listed Chinese companies; and (III) margin trading of Commission-Identified Issuers should be prohibited. I. The PCAOB and SEC should include fiscal year 2020 financial statements intheir determination of “non-inspection years” for issuers.As the Rule notes, the HFCA provides that “non-inspection years,” i.e. a year in which the PCAOB is unable to fully inspect an auditor, could be any year after the date of the enactment of the HFCA. It appears the current SEC interpretation of the statutory text would mean that the first possible non-inspection year for an issuer would be 2022, not 2021. We believe this is an incorrect reading of both the text and Congressional intent, and that the SEC should make clear that annual reports filed in 2021 which include financial statements for the fiscal year ended December 31, 2020 would be the first eligible non-inspection year for an issuer. Delaying this determination into 2022 would be contrary to Congressional intent and unnecessarily prolong American investors’ exposure to fraudulent Chinese companies.4 II. The SEC should publish a list of Commission-Identified Issuers on its websiteand issue alerts for investors regarding the unique risk associated with U.S.-listed Chinese companies.3 https://www.asiatimesfinancial.com/ccp-announces-plan-to-take-control-of-chinas-private-sector “President issues 'important instructions' to all regions to boost party control over private enterprise and rejuvenate the nation; all firms will need employees from the party to boost law abidance and moral standard”. 4 https://markets.businessinsider.com/news/stocks/david-einhorn-investor-letter-archegos-gsxtechedu-stock-trading-real-story-2021-4-1030314247?op=1 GSX Techedu is yet another Chinese company listed on an registered exchange that short-seller Carson Block said was a "near-total fraud," while Andrew Left of Citron said it's "the most blatant Chinese stock fraud since 2011." This continues to happen as Wall Street banks, asset managers, and exchanges turn a blind eye to the harm it causes to investors and the integrity of our markets. How many more times must this happen before the SEC stops the CCP’s fraud on our markets? 33
The Commission seeks comment on whether it should make a list of Commission-Identified Issuers publicly available. We believe the Commission must make this list available and easily accessible on its website. It should also go further and issue public statements (such as a “risk alert”) to investors regarding the risks associated with opaque Chinese businesses and the implicit and/or explicit control over these companies by Chinese Communist Party members. American investors are blind to the true financial condition of Chinese companies because the CCP asserts a national security privilege to prevent routine financial audits.5 This act intentionally keeps investors in the dark and subjects them to a risk of fraud that is very real. While the HFCA Act made great progress towards addressing this problem, there is a risk that Main Street investors are still not fully aware of the disclosures provided in the Rule, or do not know whether certain companies they are invested in are Commission-Identified Issuers. III. Margin Trading of Commission-Identified Issuers should be prohibited.Given the inherit risks of investing in Chinese companies, we believe the SEC should, in conjunction with full implementation of the HFCA Act, take prudent steps to prohibit the trading of Commission-Identified Issuers on margin. The recent attention surrounding retail trading activity on mobile applications only heightens the risk that Main Street investors will be the targets of the fraud the Chinese Communist Party is running on America’s capital markets. Since it is highly likely that many Commission-Identified Issuers will ultimately be delisted in the United States, the SEC should prohibit the trading of these stocks on margin to avoid creating unnecessary risks that will disrupt markets and needlessly harm for small investors who cannot afford losses. We believe this is a reasonable and common-sense regulatory response to the underlying issue and fully within the SEC’s mandate to protect investors. Communist China Continues to Exploit the Passive Index Loophole. Since modern day China is run as a “Party-State”,6 funds that flow to Chinese industry cannot be separated from those supporting the Chinese Communist Party. As a result, there is no way to distinguish the funds raised in U.S. capital markets from those used to underwrite gross human-rights abuses and other activities that shock the conscience.7 These well documented activities include the use of forced labor,8 the ongoing internment of the Uyghurs in concentration camps,9 the construction of new coal plants that destroy the environment,10 the build-up of the People’s 5 https://www.wsj.com/articles/sec-revives-fight-over-inability-to-inspect-chinese-auditors-of-alibaba-baidu-1544229843 6 https://archive.nytimes.com/www.nytimes.com/ref/college/coll-china-politics-002.html 7 https://www.bbc.com/news/world-asia-china-51697800; https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-mightblacklist-chinas-hikvision-over-uighur-crackdown-source-idUSKCN1SS28U. 8 https://thehill.com/blogs/congress-blog/homeland-security/522443-countering-chinas-forced-labor-practices; 9 https://www.bbc.com/news/world-asia-china-51697800; https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-might-blacklist-chinas-hikvision-over-uighur-crackdown-source-idUSKCN1SS28U. 10 China’s Engine of Environmental Collapse, Richard Smith, Pluto Press, 2020. 34
Liberation Army,11 and support for a cyber-army that relentlessly attacks the U.S. and other nations of the free world.12 Interestingly, despite Wall Street’s public support for environmental and social issues, it has neither stopped doing business with, nor begun to divest its portfolios of any security subject to Communist China’s repressive authoritarian regime.13 Until this sentiment changes, Wall Street will continue to push Chinese companies into our U.S. markets,14 and these companies will continue to pose a major risk to American retirees and savers.15 Wall Street is taking advantage of a regulatory loophole that allows passive index funds and index providers to direct American investor dollars into mainland Communist Chinese companies included in international or emerging market indices. As the SEC is aware, inclusion in an index allows Wall Street to steer billions of dollars into opaque Communist Party-Controlled Chinese businesses.16 Yet, investors may have no idea that the index fund they are buying includes direct exposure to Communist Party-controlled entities and/or Chinese companies with non-existent internal controls and unverified financials.17 The ASA has previously called on the SEC to close the passive index loophole by prohibiting the inclusion of any Chinese company in an index fund. Hard earned American investor dollars cannot continue to flow into the black box that is Communist China. We believe now is the time for the Commission to protect American investors from Chinese companies that are included in passive index funds and apply EVERY SEC rule to each company included in an index. The Biden Administration has adopted a “Buy American” policy and it seems logical for the SEC to adopt the administration’s whole-of-government approach by promoting American investment in American companies. Failing to close the passive index loophole will continue to 11 https://www.cnn.com/2020/10/29/asia/us-election-us-military-indo-pacific-intl-hnk-ml/index.html 12 https://www.cnbc.com/2020/07/07/fbi-chief-slams-chinese-cyberattacks-against-us-hudson-institute.html; https://www.justice.gov/opa/pr/chinese-military-personnel-charged-computer-fraud-economic-espionage-and-wire-fraud-hacking. 13 https://www.wsj.com/articles/china-has-one-powerful-friend-left-in-the-u-s-wall-street-11606924454; https://www.bloomberg.com/news/articles/2020-12-03/wall-street-keeps-pushing-into-china-as-washington-balks 14 https://www.theepochtimes.com/chinese-companies-hold-record-ipos-in-us-despite-tensions_3798475.html “China-based companies have raised around $4.4 billion through March 31, 2021 in 20 separate IPO transactions, according to data from Deloitte & Touch.” 15 https://www.fool.com/investing/2020/12/12/is-investing-in-chinese-stocks-worth-the-risk-righ/. 16 https://oxfordbusinessgroup.com/overview/indexed-growth-inclusion-global-indices-often-results-greater-flow-funds-capital-markets-it-just-one 17 https://pcaobus.org/oversight/international/denied-access-to-inspections; The PCAOB noted that it is unable to inspect the auditors of over 200 companies listed on exchanges in the United States or to determine who really controls them. 35
provide Chinese companies with an unfair and unequal playing field over American companies18 and play right into the hands of the Chinese Communist Party.19 Conclusion. Twenty years ago, the consensus theory in American foreign policy circles and on Capitol Hill was that as China grew wealthier, it would become a responsible international stakeholder. Unfortunately, that hopeful vision never materialized. Today, Communist China seeks to become the world’s dominant superpower. To realize that goal, the CCP needs access to Western capital. Many on Wall Street still push dovish and discredited narratives to justify the profits they reap from facilitating that access. They will continue to put their own financial interests over the economic and national security interests of the United States until it is no longer legal or profitable to do so.20 The Biden Administration recently warned that “China’s leaders seek unfair advantages, behave aggressively and coercively, and undermine the rules and values at the heart of an open and stable international system.”21 Loopholes and exemptions in U.S. law have allowed the savings of American investors to fund Chinese companies that are outright frauds, arms of the Chinese Communist Party, or engaging in activities that are hostile to American interests for far too long.22 We would never allow a French company to engage in such acts – why should oversight of a Chinese company be any different? The SEC has explicit regulatory authority over regulated Wall Street entities facilitating Communist China’s fraud on America’s capital markets, and a unanimous Congress has told the Commission to use it. We appreciate the Commission’s action to implement the Rule and attention to this critical and bipartisan investor protection issue. The ASA and its member organizations stand ready to assist the SEC to end the Chinese Communist Party’s exploitation of America’s capital markets and protect those working families, retirees, and savers who invest our markets. 18 https://www.theepochtimes.com/chinese-companies-hold-record-ipos-in-us-despite-tensions_3798475.html In Q1 2021, there were only six U.S. IPOs raising $370 million for China-based companies v. 20 from raising $4.4. billion. Chinese companies should not have a regulatory cost advantage over American companies competing for the same capital in U.S. markets. 19 Political Warfare “Strategies for Combating China’s Plan to “Win without Fighting”, Kerry K. Gershaneck, Marine Corp University Press, 2020. https://www.usmcu.edu/Portals/218/Political%20Warfare_web.pdf?ver=bUhYJSVrMH17edldgyg28w%3d%3d 20 https://www.uscc.gov/research/chinese-companies-listed-major-us-stock-exchanges. “As of October 2, 2020, there were 217 Chinese companies listed on these U.S. exchanges with a total market capitalization of $2.2 trillion. There are 13 national-level Chinese state-owned enterprises (SOEs) listed on the three major U.S. exchanges.” 21 Interim National Security Strategic Guidance, pg 20. https://www.whitehouse.gov/wp-content/uploads/2021/03/NSC-1v2.pdf 22 https://healthymarkets.org/archives/2101; https://www.americansecurities.org/post/why-are-american-investors-funding-chinese-fraud. 36
Sincerely, Christopher A. Iacovella Chief Executive Officer American Securities Association Cc: William Duhnke III, Chairman, Public Company Accounting Oversight Board 37
October 26, 2021 The Honorable Brad Sherman The Honorable Bill Huizenga Chairman Ranking Member Subcommittee on Investor Protection, Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets Entrepreneurship, and Capital Markets U.S. House of Representatives U.S. House of Representatives Washington, DC 20515 Washington, DC 20515 Re: October 26th Subcommittee Hearing Entitled “Taking Stock of China, Inc.: Examining Risks to Investors and the U.S. Posed by Foreign Issuers in U.S. Markets Dear Chairman Sherman and Ranking Member Huizenga: For years, the American Securities Association (ASA)1 has been advocating to remove fraudulent Chinese companies from our capital markets because of the harm they have caused America’s retail investors and working families. That’s why we grateful to provide this statement for the October 26th Subcommittee hearing regarding the risks U.S. investors face from Chinese companies listed in the United States. We appreciate Congress’ continued bipartisan approach to address the biggest threat facing American investors today, and we applaud the Subcommittee for holding this hearing today. Recent Action. The ASA is proud to have partnered with numerous members on both sides of the aisle on the Holding Foreign Companies Accountable Act, (HFCAA) a bill which was recently enacted into law after passing both chambers of Congress unanimously. We are eager to continue working with policymakers in a bi-partisan manner to protect the interests of American investors and the U.S. capital markets. We welcome the recent statements and actions taken by the Securities and Exchange Commission (SEC) to halt new listings of Chinese companies in U.S. markets. These companies continue to fail to comply with our laws and fail to provide even a baseline level of disclosure regarding their risks and true ownership structure. As SEC Chairman Gary Gensler noted recently, “Whether in California, the Cayman Islands or China, all companies that seek to raise 1 The ASA is a trade association that represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth. The ASA’s mission is to promote trust and confidence among investors, facilitate capital formation, and support efficient and competitively balanced capital markets. This mission advances financial independence, stimulates job creation, and increases prosperity. The ASA has a geographically diverse membership of almost one hundred members that spans the Heartland, Southwest, Southeast, Atlantic, and Pacific Northwest regions of the United States. 38
money in the deep and liquid U.S. capital markets should play by America’s rules.”2 We could not agree more, and we appreciate Chairman Gensler’s leadership on this critical issue. Next Steps. While Congress has already made great progress by passing the HFCAA, the recent losses of billions of American investor dollars in July create an urgency that requires further Congressional action.3 We believe the current interpretation of the HFCAA will allow fraudulent Chinese companies to list on U.S. exchanges for an unacceptably long period of time and harm American investors in the process. The ASA is also concerned about the attention – or lack thereof – that U.S. exchanges have given this issue and their apparent willingness to continue to allow Chinese companies to list in the U.S. The exchanges are self-regulatory organizations governed by the SEC with an obligation to protect the American public. Preserving a business relationship with a foreign government does not supersede that obligation. This Committee can continue to protect investors as well as the economic and national security interests of the United States by passing Chairman Sherman’s Accelerating Holding Foreign Companies Accountable Act. This bill, also introduced by Senator Kennedy, passed the Senate unanimously and would remove non-compliant Chinese companies from U.S. exchanges starting in 2022. In the interim period, the SEC could also recommend that U.S. stock exchanges delist every Chinese company and any index fund that includes such companies until those companies comply with U.S. financial, accounting, disclosure, and governance laws. Additional Information. The ASA is also pleased to provide the materials below to the Subcommittee regarding the pervasiveness of the Chinese fraud perpetrated upon our markets and potential solutions for policymakers. These materials include: • October 2019 ASA Op Ed “Why are American Investors Funding Chinese Fraud?”5• June 2020 ASA Op Ed: “Washington Must End China’s Fraud on our Markets”;6• July 2020 ASA letter to the SEC regarding the SEC’s roundtable on emerging marketinvestment risk;72 SEC Chair: Chinese Firms Need to Open Their Books – Wall Street Journal (opinion by Chair Gensler) September 13, 2021. 3 https://www.wsj.com/articles/investors-rethink-china-bets-after-beijing-crackdown-triggers-stock-market-rout-11627669954 5 https://www.americansecurities.org/post/why-are-american-investors-funding-chinese-fraud 6 https://www.americansecurities.org/post/asa-opinion-washington-must-end-china-s-fraud-on-our-markets 7 https://www.americansecurities.org/post/asa-sends-letter-to-sec-highlighting-risks-to-investors-from-chinese-companies 39
• March 2021 testimony before the U.S.-China Economic and Security ReviewCommission for its hearing entitled “U.S. Investment in China’s Capital Markets andMilitary Industrial Complex”;8 and• May 2021 ASA comment letter to the SEC regarding implementation of the HoldingForeign Companies Accountable Act.9Conclusion. As one author put it “many in government and the private sector see political warfare waged by hostile countries against the United States as important, but not my job,” we don’t believe that applies to this Committee and how it has approached the China issue.10 We thank the members for their ongoing attention and action in this area and we stand ready to assist you in any way we can to protect America's retail investors and the integrity of our capital markets. Sincerely, Christopher A. Iacovella Chief Executive Officer American Securities Association 8 https://www.americansecurities.org/post/asa-submits-testimony-to-u-s-china-commission 9 https://www.americansecurities.org/post/sec-must-swiftly-implement-holding-foreign-companies-accountable-act 10 Political Warfare : Strategies for Combating China’s Plan to “win without fighting”, Kerry K. Gershaneck, Marine Corps University Press, 2020. https://www.usmcu.edu/Outreach/Marine-Corps-University-Press/Expeditions-with-MCUP-digital-journal/To-Win-without-Fighting/ 40
May 4, 2022 The Honorable Nancy Pelosi The Honorable Kevin McCarthy Speaker of the House Minority Leader U.S. House of Representatives U.S. House of Representatives Room H-305, The Capitol Room H-204, The Capitol Washington, DC 20515 Washington, DC 20515 The Honorable Chuck Schumer The Honorable Mitch McConnell Majority Leader Minority Leader United States Senate United States Senate Room S-221, The Capitol Room S-230, The Capitol Washington, DC 20510 Washington, DC 20510 Dear Speaker Pelosi, Leader McCarthy, Leader Schumer, and Leader McConnell: The American Securities Association (ASA)1 wishes to provide our view on several legislative provisions that will be considered by conferees for the House-passed America COMPETES Act (H.R. 4521) and the Senate-passed United States Innovation and Competition Act (S. 1260). For years, the American Securities Association (ASA) has been advocating to remove fraudulent Chinese companies from our capital markets because of the harm they cause America’s retail investors and working families. We appreciate Congress’ continued bipartisan approach to address some of the biggest threats facing investors and our economy today. ASA strongly supports the following provisions: I. AHFCAA of the America COMPETES Act regarding Chinese companies listed onU.S. exchanges.The ASA continues to recommend that U.S. stock exchanges be forced to delist every Chinese company and every index fund that includes such companies until these companies comply with U.S. financial, accounting, disclosure, and governance laws.2 1 The ASA is a trade association that represents the retail and institutional capital markets interests of regional financial services firms who provide Main Street businesses with access to capital and advise hardworking Americans how to create and preserve wealth. The ASA’s mission is to promote trust and confidence among investors, facilitate capital formation, and support efficient and competitively balanced capital markets. This mission advances financial independence, stimulates job creation, and increases prosperity. The ASA has a geographically diverse membership of almost one hundred members that spans the Heartland, Southwest, Southeast, Atlantic, and Pacific Northwest regions of the United States. 2 See e.g. ASA written testimony for March 19th, 2021 hearing of the U.S.-China Economic and Security Review Commission, available at https://www.uscc.gov/sites/default/files/2021-03/Christopher_Iacovella_Statement_for_the_Record.pdf 41
The ASA is proud to have partnered with numerous members on both sides of the aisle on the Holding Foreign Companies Accountable Act, (HFCAA) a bill which was enacted into law at the end of 2020. We are eager to continue working with policymakers in a bi-partisan manner to protect the interests of American investors and the U.S. capital markets. While Congress has already made great progress by passing the HFCAA, the recent losses of billions of American investor dollars create an urgency that requires further Congressional action.3 We believe the current interpretation of the HFCAA will allow fraudulent Chinese companies to list on U.S. exchanges for an unacceptably long period of time and harm American investors in the process. The Accelerating Holding Foreign Companies Accountable Act (AHFCAA) would delist Chinese companies that refuse to abide by U.S. corporate governance and auditing standards from U.S. exchanges sooner than current law. Congress has rightfully concluded that there is no good reason to allow such companies to list in the United States and expose American investors to fraud perpetrated by the Chinese Communist Party (CCP.) The Senate recently passed the AHFCAA by unanimous consent, demonstrating once again the bipartisan nature of this issue, and we urge Congress to include this provision in final legislation. In addition, we recommend the conferees add a section to this bill to end the use of the “passive-index loophole”4 by Wall Street. This loophole allows Chinese companies to be included in indexes offered in our markets. Ending this practice will prevent any end-run around U.S. laws and keep CCP companies forced to delist in the U.S. and who are only listed on foreign exchanges from accessing U.S. investor dollars through index ETFs. If this loophole is not closed, then Wall Street will continue to facilitate CCP-controlled companies access to American investor money contrary to the will of Congress. The ASA is also concerned about the attention – or lack thereof – that U.S. exchanges have given this issue and their apparent willingness to continue to allow Chinese companies who do not follow U.S. laws to be listed for trading in the U.S. The exchanges are self-regulatory organizations governed by the SEC with an obligation to protect the American public and our markets. Since the SEC does not appear willing to enforce the regulatory obligations of exchanges who list companies that fail to follow U.S. law, we recommend that Congress include language that explicitly forces such exchanges to delist any company, Chinese or otherwise, that does not follow U.S. law. This is extremely important to protect investors and safeguard the integrity of our markets. 3 https://www.wsj.com/articles/investors-rethink-china-bets-after-beijing-crackdown-triggers-stock-market-rout-11627669954 4 https://www.americansecurities.org/post/why-are-american-investors-funding-chinese-fraud 42
Finally, ASA continues to support bipartisan efforts to remove Chinese companies from the Thrift Savings Plan (TSP) so that American taxpayers and government workers and retirees are not funding fraudulent and CCP-controlled entities.5 We recommend adding this bipartisan solution to the final bill and end the funding of China’s economic and military rise by federal government employees. II. Rep. Spanberger provision of COMPETES Act - China Financial Threat MitigationThe Rep. Spanberger provision would require the Treasury Department to provide Congress with a report regarding the threats to financial stability posed by China, along with recommendations for how the United States should use its influence with international organizations to address the China threat. To date, the Treasury Department and the Financial Stability Oversight Council (FSOC) have done little to examine potential risks posed by China. This report would be an important step towards adopting an all-of-government approach towards countering threats that are unique to China. Additionally, the ASA opposes the following provision and urges Congress to reject its inclusion in any final legislation: I. Rep. Sherman amendment related to private company disclosureThe ASA opposes this provision, which would impose onerous and unprecedented mandates upon private businesses that raise capital using certain exemptions under the securities laws. It would also grant the SEC unfettered authority to write additional rules to require information that private companies and private funds would have to disclose – either to the SEC or publicly. Businesses and private funds that raise capital under SEC Rule 506 or Rule 144A already provide the SEC with basic information about their operations. The requirements in this provision would go well beyond what is currently required and allow the SEC to question or examine investments that private funds make in certain industries. They will also require, in some instances, small or startup companies to hire outside counsel in order to comply – a cost that many small businesses cannot afford. The language regarding “principal beneficial owners” also directly conflicts with customer due diligence (CDD) and proposed beneficial owner reporting requirements administered by the Financial Crimes Enforcement Network (FinCEN). This would create additional costs and 5 See e.g. Taxpayers and Savers Protection Act, Rubio Leads Bipartisan, Bicameral Bill Banning TSP Board From Steering Federal Retirement Savings to China - Press Releases - U.S. Senator for Florida, Marco Rubio (senate.gov) 43
complexities for businesses while failing to fulfill any regulatory mandate or need by the SEC. We urge Congress to drop this provision. Thank you for your attention to these matters and please reach out to us if you would like to discuss these issues further. Sincerely, Christopher A. Iacovella Chief Executive Officer American Securities Association 43